ABOUT THIS EPISODE

My guest this week is my father, Jim O’Shaughnessy. He was a pioneer in quantitative equity research, part of an early group of explorers who combed through data to find factors which predicted future stock returns. While we’ve both written extensively on factor investing, we chose to mostly avoid that topic for this conversation. Instead, we discuss what has been a fascinating and colorful career on Wall Street. We talk about the power of premeditation, formative books, and his crazy experience during the dot-com boom when he ran a robo-advisor 15-years ahead of its time.

IN THIS EPISODE

TRANSCRIPT

00:00:00This podcast is sponsored by cf institute the global association of investment professionals whose mission is to lead the investment profession by promoting the highest standards of ethics education and professional excellence for the ultimate benefit of society Cfo institute serves a global community of investment professionals working to build

00:00:17an investment industry where investors interests come first financial markets function at their best and economies grow The chartered financial analyst credential is the most respected and recognized investment management designation in the world The views expressed in this podcast do not necessarily represent the views of the faa institute

00:00:36Hello and welcome everyone I'm patrick o'shaughnessy and this is invest like the best this show is an open ended exploration of markets ideas methods stories and of strategies that will help you better invest both your time and your money You can learn mohr and stay up to date

00:00:53an investor field guide Dot com Patrick o'shaughnessy is a principle in portfolio manager at o'shaughnessy asset management all the pains expressed by patrick and podcast guests are solely their own opinions and did not reflect the opinion of o'shaughnessy asset management This podcast is for informational purposes only and

00:01:12should not be relied upon as a basis for investment decisions Clients of a saucy asset management may maintain positions in the securities discussed on this podcast I guess this week is my father jim o'shaughnessy I debated whether or not to do this interview but many people have asked

00:01:27for it and i'm glad that i did I had never heard a few of the stories he tells which is a testament to the power of this kind of interview My dad was a pioneer of quantitative equity research part of an early group of explorers that studied factors

00:01:40which predicted future stock returns well many of his peers were academics He was pure practitioner from day one along with others that are firm We've been through a lot together professionally and everyone would agree that the guy has ice water in his veins and unwavering discipline Two traits

00:01:55that could bring you far as an investor for those looking for a discussion of factor investing look elsewhere because we agree on just about everything in the world of investing We chose to instead discuss what has been a fascinating career chockfull of business and life lessons What's most

00:02:11interesting about our relationship is that he's taught me very few things in particular Instead he's open the doors which have allowed me to learn and experience so much more on my own than i ever could have hoped to learn under his direct tutelage It's the model for fatherhood

00:02:26that i'm using with my kids and i couldn't be more thankful for the example he has set We talk about premeditation business learning books and his wild experience during the tech boom For show notes on this episode visit investor field guy dot com forward slash jim And now

00:02:44please enjoy my conversation with jim o'shaughnessy First thanks for hiring me as a clot in turn when i had never even used excel Yes of course Nepotism at its finest even though i was really only putting together chairs and desks in the office and that's why we didn't

00:03:00let you anywhere near a real computer for locking for office space for a while Ah this is gonna be fun We will focus as much as we can on hopefully stories People haven't heard beyond just the basic common belief in factors which we've written about ad nauseum So

00:03:15i thought ah fun place to start would be with the james j hill public library in st paul minnesota Yeah and this is also fun for me because i didn't even know you had a podcast So this is kind of cool So james j hill is a research

00:03:33library in st paul minnesota where i grew up And as you know my grandfather had been very successful in the oil business Ended up giving away probably ninety percent of his money during his own lifetime But the balance went into a foundation and my uncles and aunts would

00:03:52come to st paul what's a quarter To discuss grants and also investments And i was allowed when i was a teenager finally to sit in on these dinners and what interested me the most i think was listening to my dad argue with my uncle about you know whether

00:04:10ibm was a good stock or not and it was all about personalities It was all about things that didn't seem to resonate with me at all and i kind of thought well ibm is a good or bad company based not on who the chairman is but there's got

00:04:25to be some measurement like p e or whatever So i went down to the james j hill library and originally i was very ambitious and this will tell you my age i had a paper spreadsheet was towards one of the very large ones and i originally was going

00:04:41to go to the s and p five hundred tearsheet which was a book that was put on every year immediately being very very lazy realized that that would not do and so i alighted on the thirty stocks in the dow jones industrial average went through a book that

00:04:55showed which thirty stocks were in the dow every year and then literally by hand wrote out you know price p ratio price to book dividend yield earnings yield etcetera And what i wanted to see was you know was there any measurement that lead to better performance than just

00:05:13buying all the stocks in the dow What i found very quickly was that buying thie ten stocks with the lowest p ratio killed buying the ten with the highest p ratio and it did so consistently Now of course there were periods where that didn't work generally when super

00:05:29duper growth was in fashion but in general overall rolling five in ten year periods it did very well I also found that buying the ten stocks with the highest dividend yield did extraordinarily well so i was very intrigued wanted to continue this But after all i was a

00:05:45teenager much more interested in girls and going to parties Esso i sort of shelf that research and then took it up again after getting married and the advent of computers making it a lot easier for me than i had to do it all by hand when i was

00:06:02a teenager Maybe talk a little bit More about eh Who is your grandfather My great grandfather Just to set the tone of it for some of it We'll talk about later in the conversation about things like premeditation Sure How to measure success things of that nature So i

00:06:17had the really great good fortune of being the youngest male of the third generation of my family And most of my uncle's worked for my grandfather My father did not As i mentioned he was born in eighteen Eighty five in stillwater minnesota The thirteenth child So in our

00:06:37family thirteen was always a lucky number But he was a real character Very very ambitious but also very funny very fun to be around And i had the good fortune of having dinner with him twice a week after my grandmother died right up until the point where he

00:06:54died So i got to see him a lot more than the other grandkids But you know when he was a young man he went to a university or college at that time called st john's college in collegeville minnesota Yes it is as bad as it sounds in the

00:07:08middle of nowhere in the sticks and this was in the early nineteen hundreds and he and his buddies have a keg in the woods During vespers was a catholic college for of you catholics out there They got caught and they were all immediately expelled Eso not wanting his

00:07:26father and mother to find out about this He took the train to st paul minnesota to the college of st thomas and stopped a priest that this is january stop the priest that he saw in the campus And he said excuse me father could you tell me where

00:07:41the president's office is When the priest said well why do you want to know And he said well because i'm seeking admission here and priest said but it's january you know you missed the admission schedule Why you want to get it now And my grandfather said well i

00:07:55was at st john's and i got expelled Well really why'd you get expelled having a keg in the woods during vespers And the priest said to him well do you think that st john's was fair annex in expelling you And my grandfather's answer was absolutely i knew the

00:08:11rule I broke the rule they didn't have a choice Well of course the guy he stopped was the president of the university and he had admitted my grandfather on the spot What my grandfather didn't know was that his fellow kids that had been thrown out had beat him

00:08:27there And they had all said oh no it was completely unfair of him to accept the university or college to expel us We think it's a travesty but we'd like to come here None of them got in So sort of the earliest message about my grandfather was character

00:08:44is fate if you have the character and you have the persistence and you have the vision you khun go on to do great things so it's a very long story let's Just make it short He got into the oil business and the first well that he ever dug

00:08:59was called blackwell number one and it pumped oil for more than eighty years I think i could be wrong about this I'd have check with my cousins but i think it is still pumping oil today The great irony of course was my grandfather did not trust the stock

00:09:15market You know when joe kennedy was made the head of the sec it said well you've got to send a crook to find a crook He thought the market was rigged which back during those days that primarily wass and so going into the crash of twenty nine he

00:09:31was one of the most successful wildcatters but he didn't put any money in the market like all of his fellow wildcatters who were doing it on margin sometimes five to ten dollars for one hundred dollars position They all got wiped out during the crash so my grandfather was

00:09:48in a position to go around to all of these failed enterprises and buy them out for pennies on the dollar in short order By the late nineteen thirties early nineteen forties he had one of the americas and one of the world's largest privately owned oil companies And then

00:10:04as i mentioned earlier he proceeded to give almost all of his money away during his own lifetime So also a great i'm incredibly proud of that fact He used to say to my grandmother you know money is like manure if you have it in one big pile it

00:10:19stinks to high hell heaven and you got to spread it around and make it do any good He believed in the idea of premeditation and i'm i'd love to hear whether or not you agree with that because i think this might actually be one thing we disagree on

00:10:33that's right So we can explore it a little bit I do believe in it In fact he taught me that at a very early age and the idea of premeditation was to think very long and hard about what you wanted to achieve Make sure test it you know

00:10:49he was never oh i want to be a millionaire or i want to be the president of the united states It had to be something that given your character and your abilities and your talents you could actually do And then he would say to me then envision it

00:11:06make it happen in your mind and i said so grand father you mean that kind of pretend that it's happened And he goes absolutely he said you have to premeditate everything you do and he goes because when you do this if you do it enough you're going to

00:11:22start coming up with things that you really wouldn't have consciously thought off and you'll address them right So you'll say oh i hadn't even thought about that i bet i better look into how i'm going to deal with that so i used it all of my adult life

00:11:36from wanting to get into the stock market to wanting to be in the position that i'm in today i'll tell you a funny story so you know this story so i guess it will be the listeners that haven't heard this one So i'm out for a walk and

00:11:49it's nineteen ninety three and we have just moved to greenwich from st paul and as i'm walking i kind of think well the stock market you know you've got to really be somebody for people to take you seriously and i was thirty three at the time and i

00:12:04had a lot of success with the article i had written for barons about the dogs of the dow so i thought you know what I'm going to write a book and i'm going to write a book about the way i look at the market on i went back

00:12:16and talked to your mom and she looked at me and she goes so okay you're going to write a book you do know that you have to get somebody who was willing to publish it right I said of course i'm not an idiot and i said again being

00:12:29one of the laziest human beings on the planet i'm not going to actually write the book until someone agrees to publish it So i did a cover letter that i sent to when again this will show you no internet So i sent out sixty five query letters with

00:12:42the outline for my book and for the longest time saved all the rejection Some were really really funny and then to acceptances came in and one was mcgraw hill and wiley was the other and showed it to ah my wife missy and said well here i've got to

00:13:01write a book i guess s o that led to invest like the best which basically was a book trying to teach the reader how they could emulate their favorite money manager by putting their portfolios on a database seeing the most relevant differences from the portfolio manager from the

00:13:17universe and then using those differences to create screens that got you to portfolios that looked acted most importantly performed like the manager a lot of people who know me actually i'm best known for what works on wall street but a lot of people who know me really well

00:13:33say you know that first book was actually your most radical book because you you demonstrated that you know you could you could systematize the process it's really interesting about that story is that this was also the genesis for the name of the podcast and the idea of being

00:13:50make this podcast to sort of qualitative version of that same idea find really successful stories were interesting stories at least and then try to back out what is reputable about those stories but also what's not right because there's always there's always a mix of kind of nature nurture

00:14:08and it's fascinating to learn that an investing most is what's in the data most la's was factor profiles normal portfolios that often portfolio managers under performed a simple replication person has actually as a matter of fact we haven't done it for a while I think the last time

00:14:25we did it was in two thousand Five or six but we used to routinely update the what i call clone portfolios and look at how they had done burst the manager they cloned And the last time we did it every single clone was beating the manager they cloned

00:14:40and that's part and parcel of our story Right it's the emotional side of investing that destroys virtually even the greatest minds You know if you if you cannot master your emotions you might as well just index and you might as well put it on automatic pilot because you

00:14:57know even if you index you can still have a point of failure when the market is like two thousand eight and you can sell out near the bottom So you have to be careful of that But if you can't master your emotions all the data in the world

00:15:09will not save you And so you're right though I mean it is great because in investing it's sometimes you know these it's like dieting right So there's a million diet books on the market today Most of them have really really simple easy to execute plans right And it

00:15:28is remarkably difficult to get anyone to use that simple system and it all is emotion I mean basically that's what trips us up We are you know running programs that were designed to the twenty first century on this is not unique to me I read this somewhere on

00:15:45fifty thousand year old hardware and you know that is our huge advantage the way we approach the market because we just remove the emotion But again all of that we started with premeditated all of that was premeditated How much of the advantage in fact er based strategies do

00:16:05you think if you had to sort of there's a total pie need to allocate is the factors themselves which obviously a lot of people have identified value momentum will volatility your yield quality We all have the same data right So yes certainly certainly most of the research is

00:16:22done on the same set of data versus just that that pure discipline because i'm always struck by how simplistic right A basic deep value strategy khun b where anyone can run ah price tow x comparison And you're in a basket of fifty or a hundred cheap stocks And

00:16:42how remarkably consistent that almost dumb naive Portfolio is at beating people who are incredibly smart with unlimited resources and i always come back to that idea that a lot more than people think is just pure disciplined I couldn't agree with you more I think that the factors are

00:17:04away there an expression for us to get gain alfa over long periods of time But ultimately if you don't have the discipline to stick with your underlying strategy particularly when it's not going in your favor it's nothing It's it's it's data on a page And you know i

00:17:27have always thought that now granted when i would tell people about factor investing i would you know just out of necessity make it simple right So dogs of the dow or buy stocks with low p ease et cetera Now the factors have gotten a lot more complicated and

00:17:43our colleague chris meredith is actually written a really great paper talking about the fact that really good factors air not commodities there's a lot of thought that has to go into it but ultimately action without knowledge his foolish in and knowledge without action is futile It's the ability

00:18:00to in a completely dispassionate way let the portfolios work and i ultimately have found that that is thie the single hardest thing to do We had a consultant come in after the financial crisis and say i think the number was sixty plus percent of quants violated their models

00:18:24and as you know my opinion is that negates every part of the track record because if they're going to switch horses in midstream they're no better than somebody who doesn't say they're a quant and changes their strategy dramatically you know consistency and persistence and the application of superior

00:18:45factors sounds very very simple but you know it's it's really not and so we're always looking for ways to improve what we do but without the discipline It's a fool's errand people always ask me how much mentor ship there was between you and i and interesting question because

00:19:05you're an incredibly hands off in a good way manager people and manager of children and there was really one lesson one primary lesson and it could be best but best summed up in the words Look it up wei would always ask for help or or or to hear

00:19:25what you thought about something and we have at home i'll post a picture of this library with with the episode there's a massive wall of books in the house the weaker up in with every kind of book you could imagine there's thousands of books there and i don't

00:19:40know how many of them you've read most of them and so we want you know we figured you'd be a shortcut to a lot of knowledge and homework and things like that That was i wass but i wouldn't let you know that and i always said look it

00:19:52up figure it out It was an incredibly simple powerful lesson because of its consistency that you never broke from that mold but i will I will use the occasion of talking about the library to ask that if you have the power to prescribe five books normally say one

00:20:08book but given the size of the library i'll give you a little bit more leeway if you could prescribe five books for everyone to read so everyone has to read them and you can count that they will digest them really pay attention and learn from them What what

00:20:22five would you pick So you know me i'm always over the top in terms of these types of things so i'm going to do more than five the one i would start with would be the dao de jing The way of life by lao tsu dow is um

00:20:36is one of the major philosophical lines of thought in asia i have been reading and re reading this book since i was in my early twenties and honestly i'm fifty six now Every time i opened that book i find yet another interpretation of what they're saying that i

00:20:54hadn't thought of i think it's a remarkably powerful philosophy and i think everyone would just benefit enormously if they could read it and take it to heart Another one would be a fun one Adventures of a bystander by peter drucker now drucker is best known for his consulting

00:21:13work and all you know the gm story and all that adventures of a bystander is his personal story and his personal life is almost unbelievable I mean you you would look at this and say this has to be a work of fiction He met some of the most

00:21:29incredible people at the most incredible points In time it's like if we had a time machine right And we said well where we go back Drucker was there so i think it's just a really fun book to read somebody i've admired for a long time and it shows

00:21:44how a great mind thinks Surely you're joking mr fineman fineman was thie physicist who solved the challenger problem by taking the material ah and putting it in a glass of ice and it disappeared he goes there's your problem and everyone else of course was overthinking and over analyzing

00:22:04and he had such an incisive mind Buddy was also an incredibly cool guy bongo drums you know parties and and then you know writing proofs for quantum physics I mean this guy really had it all Another book that i've read probably five or six times a zen and

00:22:24the art of motorcycle maintenance loved the book taught me a lot about how to think about the fact that people value brands right So one story that's great is they both have bmw motorcycles and person who's the author he's very happy if he's looking for his missing apart

00:22:43you'll take a soda can top and put it in there and his friend is absolutely you know aghast How can you do this This is a bmw can only use bmw parts We'll coast guess whose motorcycle works better per six very simple and to the point and ah

00:22:58much bigger message in that but it's a great book and it's just fun in its own right I love poetry so i would include the complete poems and plays of t s eliot Probably one of my favorite poets The love song of j alfred poof brock i think

00:23:12is one of the greatest poems written in the last hundred fifty years And when when i was still doing a lot of memorization i had the whole poem down it's very long You can't do the whole thing probably anymore but i would recommend that people take that in

00:23:27an author who i love but i'm going to recommend the book that i loved the most cloud atlas ah by david mitchell it is a tour de force and it's written in a very unique way but it works for those of you who have seen the movie don't

00:23:44make any comparisons The book is a thousand times better than the movie Finally on the ah market side i guess i should recommend one market book other than what works on wall street I would say the misbehavior of markets by mantle brought the chapter alone on the destruction

00:24:02of the efficient market theory is worth the entire book but hey basically demonstrates i think conclusively that markets are not log normal They're chaotic Normal on the difference there is they have much more of a peak And the tails are much longer And anyone who lived through the

00:24:20financial crisis will realize that one last one which was one where i'm not a crier Ah but at the end of the book i did have tears in my eyes It was written by a young doctor who died and it's called when breath becomes heir Yeah that book

00:24:36the last paragraph of that book is gutting if you have kids Yeah if you have children i mean yeah your mother and i used to talk about it and we agreed that the one thing that we just probably couldn't recover from is if you or your sisters died

00:24:51Now we have grandchildren so we have more to worry about So the total opposite of that At what stage of your career did you feel the most alive Wow That's A great question Probably when i formed o'shaughnessy capital management and what works on wall street just came out

00:25:11I did things that really got my publisher angry For example i gave the entire manuscript to andrew barry It barons And he wrote a huge story on it And they were livid because there were no books in the stores I said trust me barons is the bible that

00:25:26was back then Anyone who was anyone read barron's And so when the book ultimately came out boom bestseller Ah which we certainly didn't expect because it was you know graphs and charts And then at the same time concurrent with that we were launching mutual funds and quite literally

00:25:44had three to four hundred million dollars Come over the transom from the book and the article in parents All of our calls were incoming We had no outgoing calls And and you know we had tons of people calling us saying we want to work together Got a call

00:26:00from a guy up in canada which resulted in the eyes thing was dave children is dave children He wrote a book called the wealthy barber which actually has outsold the bible in canada So he's really well known up there i had no idea who he wass and so

00:26:14i thought you know who is this wealthy You know baker guy so it took the call and he starts saying you know i'm known for this but i'm really a quant i want to introduce you to the royal bank of canada and i said sure whatever and again

00:26:29i think most exciting because back then literally we did the deal that is now twenty years old the chairman and ceo of ah the rbc asset management came down to greenwich We had a date together We literally shook hands on doing the deal and that was it Now

00:26:48granted we did contracts and we did all that but it was a handshake You can't imagine anything like that happening right now So that was a really really exciting time because everything was happening at once and then the mutual funds we launched ah one called cornerstone growth shot

00:27:05out of the gate It was like one of the top performing small cap funds new york times writes a big article the wall street journal's writing and you know this is pretty heady stuff right So lots and lots of exciting times during that period So how long was

00:27:19that period from from the cessation of what works you know so that was from about nineteen ninety six and tell late nineteen ninety eight we were going into the bubble a cz you know in hindsight and our stuff was you know like the entire world was a tuxedo

00:27:37and we were a pair of brown shoes right Nobody wanted value a small cap the only and interestingly enough human nature you didn't get compared to the russell two thousand growth index you got compared to the nasdaq right And you know you tried to explain to people well

00:27:52that's not a fair comparison They weren't hearing it So definitely the two years two and a half years ninety six through end of ninety eight beginning of nineteen ninety nine the most popular theme today or one of the most popular themes in the fintech space is this idea

00:28:08of robo advisers and the fact that so much of what people used to do it all using all sorts of different people in systems can now be centralized and is almost a commodity to get your kind of risk level based asset allocation for extreme for if you go

00:28:24to swab khun b for free right I'm waiting for them to say we're going to pay you Yeah well that might that might actually happen So i'd be curious to know how much you can tell us about what i think is the very first row advisor or early

00:28:39version of a robo adviser that you launched called net folio and to get into the story behind net folio i think would be fascinating because it was an idea fifteen or so years behind that had a little ahead of its time So this is an interesting story because

00:28:55it shows the power of what is happening in the marketplace has on even people who pride themselves on being completely dispassionate non emotional I had in fact written a piece for our website called the internet contrary in and i wrote that in april of nineteen ninety nine and

00:29:15in it i basically said when this bubble pops eighty percent of these cos they're going to be carried out feet first There there burn rates are enormous Evaluations are in the stratosphere Ultimately economics winds And then i got the bright idea Hey wouldn't it be cool to have

00:29:33an online investment adviser We called it net folio And And what we were pitching and designing was the ability for somebody to come to net folio take a risk profile And then we would serve up one of our many many quantitatively deride portfolios The cool thing about it

00:29:51was we would show you the back test of that particular strategy And we would show you the stocks that we're currently qualifying So let's say that you were anti smoking right And philip morris was one of the stocks You could kick it out and then the next name

00:30:07on the quant list would go in its place And we managed through negotiations with some of the biggest houses on wall street to make it very cheap At the time it was two hundred dollars All your trades were free You could trade i think Well limited it to

00:30:25like three times a year for that Two hundred dollars membership and we called what we were what we thought would be a revolution personal funds Back then everything was mutual funds We had a hysterical ad campaign about the difference between mutual funds and personal funds Ah and the

00:30:44funding of it was absolute crazy I mean it went from the first money seed round was a twenty five million pre money valuation The next one like a month and a half later Seventy two million dollars prix money valuation than in january of two thousand We got a

00:31:00ludicrous offer from one of the very large wall street bank which we ultimately didn't take And you know it keeps me humble right Because i've made so many mistakes in my life this was probably the biggest because they offered us an enormous sum of cash They are offered

00:31:18us options on their shares which were a great deal but myself and our advisors who World venture capitalist right there like jim you're crazy this's a legacy company You can't do that your ipo goes away you've got to be pure internet and you know you not being or

00:31:37will you around but you were a kid you probably can't even get your head around that kind of thinking But that was the thinking And so we turned it down And then of course barron's published burn rate which basically took the internet down single handedly jack willoughby God

00:31:54bless him He ah did you said earlier about how sometimes these simple things Well all he did was compare the amount of cash that these companies had with their monthly birth burn rate and list when they were all going to die Program calls that default dead Yeah and

00:32:12they were all default dead and we went along with them So i think that ah yeah we were We were the first out there out of the gates in two thousand Still think it's a great idea I think i would love the idea of being able to do

00:32:26active portfolios mixed with other things Right But yeah that was seventeen years ago It's Amazing that it took obviously there's a there's a vc cycle And there was a quite a bit of a ted period a lot of burn off to do after after the collapse of the

00:32:41nasdaq but pretty shocking How long it wass until just just in the last few years yeah the better mints and well fronts of the world are are starting to gain some scale but even then it's all passive simple asset allocation this is not you know not not rocket

00:33:00science In terms of the asset allocation they do some extremely you know i know betterment pretty well and they do some really neat stuff on behavioral finance And yeah on mark listen to that podcast It was great actually you know engineering people's decisions which i think is a

00:33:13hole Ah wholenother interesting topic right Because the financial visors khun fascinates people with that as well But it's amazing how long it takes to get from the same might basically the same idea that actually had that sonny doesn't even exist yet No one's even built this so they

00:33:27net folio is was a kn iterating ahead of these guys write because you're going to be able to mix active with passive We didn't have tfc but we did have access to mutual funds right for the fixed income portion Look i think that one of my worries with

00:33:42net folio is still one of my worries today and that is yeah you can automate it all and if you can do it in a matter were you re balance with some frequency and you know you're buying forcing you to buy the asset class that's going down and

00:33:58sell off the one that's going up great guess what sits squarely in between that success and the technology human nature and i don't think that getting an email saying hey don't panic when they're watching the dow down nine hundred points in one day is going to work I

00:34:18wish them all the best I love this opportunity for younger investors especially i think you know i had a company that was trying to do just that And inasmuch as they configure the behavioral stuff out that's where i would be focusing right i would be focusing on how

00:34:34do you interrupt this Because it's it's the lizard brain that is making these choices it is not your your best evolve itself And i have seen some of the smartest people i know quite literally geniuses you know immediately just totally screw up their entire future because of emotions

00:34:56and selling when they should have been Buying and so i think that's the challenge we haven't seen a really bad bear market and hopefully we won't see another killer bear market like the financial crisis for a while But when the bear market comes that will be the test

00:35:10of the robo advisers it's always interesting to see the behavior gap the difference between time later than dollar waited returns And i saw when someone published recently the behavior gap for the major factor single factor e t f ce and its enormous yet for the for the minimum

00:35:28volatility e t f it was something like on the trailing three year twenty five percent a year it's crazy because obviously it did incredibly well the money fifteen million dollars in and then it goes on to significant to perform and then everyone may orders and everyone's going to

00:35:43bail Yeah so i always think about that example and countless others like it when people ask well everyone knows about these factors so well they keep working on then you see just repeatedly these examples of the same foolish behavior just one level up Yeah if it's not an

00:36:00individual stock that they're being dumb about With twenty twenty turns a turnover it's fc represent a basket of your mutual funds or managed money it's all the same Ah you know you know this because you have been around me for a long time your entire life in fact

00:36:15but you know i always say the four horsemen of the investment apocalypse are fear agreed hope and ignorance if you think about it fear greed and hope they're all emotions ignorance even ignorance even if you correct it for your green hope we're going to wipe you out And

00:36:30this is what fascinates me about this is everybody knows this like back when i wrote my original paper in nineteen eighty seven about using quantitative models is an offset too flawed human decision making I've gotten a lot better titles you know this data was all there right We've

00:36:49had this date since the fifties in various forms and and yet you know it doesn't matter If it could be wall street it could be doctors It could be school administrators it could be bettors Everyone under performs a simple well tested quantitative screen and we do so because

00:37:08as walt kelly said in pogo we've met the enemy and it's us and what's cool about that for a ce far as i'm concerned is a cz long as human beings price securities We got a job because they're going to continually make the same mistake time and time

00:37:23again and there's very little that we can do to stop them i think Look you know this is one of my hobby horses I think the entire investment management approach is deeply flawed People using quarterly results That's noise There is no signal there none And yet why did

00:37:43this Why did this happen Why did this happen We don't know And yet everyone wants a narrative We're storytelling creatures And i used to say we tell stories about why you should pay no attention to the stories And when you make decisions based on quarter to quarter you're

00:38:00going to fail Basically you have you have guaranteed that you will fail because there'll be a bad quarter or a good quarter Ah and the lead you two types of behaviour that are foolish Three years basically again Mostly noise Some signal some signal But you know josh brown

00:38:19Ah at the reform broker has a piece about a study that looked at managers who are fired because of underperforming three years Guess what They outperformed the managers that the people hire to replace them regression reversion to the mean and so i think if you could have a

00:38:39truly long term perspective right ten plus years and if you're an endowment or your foundation or your college your your your perspective should be infinite because hopefully that college is gonna be around for a long long time If you're even a fifty six year old like me well

00:38:57i should have an infinite time arising too because i have a three year old grandson in a ten month old granddaughter right And yet people don't think like that and so we use tools because we have them write it doesn't mean that they're good to use So if

00:39:13you're looking at just three year periods you're really setting yourself up for failure leave investing for awhile because we agree on just think i'm gonna learn anything I remember one time you came into my office and you were really steamed and because you loved and then well you

00:39:29still love but at that time you really loved to argue you came in you sat down enough and you said you know you're the only one who can argue well and i agree with everything you say let's jump the business sure and hone in on a couple of

00:39:46of the biggest lessons that you've gleaned over time across too relatively small businesses Ah hot startup for for several years they're right but also a big huge you know mainstay wall street bank and bear stearns if you could maybe pinned down to three things that you found completely

00:40:06outside of investing just terms of running a business running a good practice being a good manager however you want to trip it the question that you clean i think that would be a neat and eat angle outside of investing Absolutely well So number one from my own experience

00:40:21running my own companies i'm not running a kindergarten here i hire adults who i expect to do a great job I hire them because i think very highly of them and they're past would suggest that they're going to do great things here so things like you know we

00:40:37have no vacation policy at o'shaughnessy asset Management again adults khun decide when they want to go on vacation and how long they want to go they can get their work done at home or here at the office I really don't care I'm not a face time guy and

00:40:51so i think the more freedom that you give people that's when you get the best out of people right and and i'm a huge believer in never making a decision right I'm chairman seo what do i know about the way we're doing You know trading of individual accounts

00:41:07through some of the big brokers basically nothing So i've got a guy who knows more than you know i'll ever know and knows more than a lot of people in the industry in power him tell him you know you tell me the way you want to do it

00:41:20and that's the way we're going to do it And i think that that that treating people well and with respect you get the most out of them prescribing rules and regulations and all that simply leads good people teo chaff and say you know what I'm going to go

00:41:37somewhere else it leads be the ogre People to always refer back well there was a rule and this is the rule i've always found that people who are really big on rules in terms of how they conduct themselves tend to be mediocre Another thing i would say is

00:41:53consistency I'd like to joke that i have a very low standard deviation of return The president of this company chris lovelace has said to me on number of occasions i always know when i'm going into your office to ask you something i pretty certain what the answer's going

00:42:08to be but you know i've got to ask you anyway i think the more consistent you can be with the people who work with you the better no huge surprises in terms of you don't come out of left field and say you know we're going to do it

00:42:22this way When i started o'shaughnessy capital management it kind of was that way it was my way or the highway and it was you know we're doing this We're doing this we're doing this and i learned that if you want and to have really great people to stay

00:42:35with you and do the great job that you know they can you can't you can't do that so consistency in terms of allowing people the freedom to do their work that they can And then from from bear stearns bear stearns was really interesting because they were kind of

00:42:55the last of the rial entrepreneurs on wall street They basically left me alone right I was an asset management I devised how i wanted to approach ah the bear stearns network And as long as i kept growing they were very very happy they didn't meddle too much And

00:43:13yet also i saw the the downside of bureaucracy right takes forever You know we need a data set It's got to go through this committee and this committee in this committee And we would have gotten things done a lot faster for even the most entrepreneurial bank right I

00:43:31can only imagine how the other ones are just you know committee upon committee upon committee i think meetings for the most part are a waste of everyone's time And and i think that you know they're they're on a lot of people's Well we gotta meet about this No

00:43:45actually we don't So they were really good and leaving me alone getting what i needed was always a challenge was always frustrating Bye you know i had a good time There are a lot of great people lot of smart people And then finally i i would say ultimately

00:44:02i think buffet said this but i really agree with it you know And that is you know your reputation buffet i think said something along the lines of you know it could take twenty years to build your reputation and you know just a couple hours to totally ruin

00:44:15it and what most people don't understand about wall street you know especially those really angry at the street is that essentially i think more than most businesses our business is built entirely on trust when you say you decay some trade right that means don't know you do that

00:44:35and you're going to be cut out You keep you do that more than once or twice they're going to catch out because his small group that you're dealing with so everything is based on your word and it's operated you know we've had some big boo boos but it

00:44:51has operated pretty well over time i mean look at solomon brothers for example during the treasury scandal the treasure was going just disallow solomon basically which would have shut them down Warren buffett becomes temporary co chairman calls the head of the treasury apologises profusely for something he didn't

00:45:12do but immediately the guy listened and he knew buffets reputation He knew he had integrity Guess what He saved the firm simply by his reputation The section of snowball that gets into that solomon brothers scandalous So incredible and amazing power Just just owning up to something a proud

00:45:31moment for him So i'm curious what the most proud moment or the thing you're most proud of in your career is oh boy that's tough So i guess what i'm most proud of and i had offers from very big institutions not to do this but i was passionate

00:45:52about a level playing field and educating people Ah that's Why i've written four books right I had people tell me you're insane to write what works on wall street Why would you put this out into the public domain Come work with us we'll keep it proprietary Will you

00:46:11know we won't tell anyone with secret Sauce is but a very strong element of my belief system is educating i think that if you can empower people to do better and to level the playing field that's really cool and i think that especially what works because now we're

00:46:33in our fourth edition and yet you could go in there if you want to do your homework you can see wow maybe i shouldn't buy stocks that are the most expensive over long periods of time because they do worse than t bills and if you're open to it

00:46:47right And all we can say is here's the information but i was if you're talking about what i'm proud of i'm really proud of that I'm proud of the fact that not only was i a maniac in you'll know because we used to vacation in nantucket and this

00:47:02was before laptops and i you know half of our ford explorer was taken up with my computers because i was running tests for what works on wall street I think that part saying you know definitively this is what has worked we believe it's going to continue to work

00:47:18empowering individuals to use that data now I know much more about behavioral finance right And so you khun educate people till you're blue in the face and they'll still forget all of that education But i think that's what i'm most proud of what was putting all that information

00:47:34out there and letting investors take advantage of it We cut off a bit earlier talking about premeditation but we'll circle back to because there's another question So you've got this crazy journal where you wrote down how young you were early twenties probably know it's twenty nine a big

00:47:50list of a pretty very very different very highly very list of things it's not just a bunch of investing goals no means most of which have happened more than ninety percent so obviously there is i don't deny that there's tremendous power in setting goals and premeditating those ideas

00:48:07or scenarios or whatever but i wonder to what there's two interesting threads here one is to one extent premeditation and goal setting is very self limiting meaning yes it's powerful in that if you set a goal and you're the kind of person that can achieve those things you'll

00:48:22probably do it if you have the drive and the grit but there's a whole universe of things that that may then preclude you from doing that you don't there's less serendipity there's less surprise rights right But the reason i circle back to it is to talk about the

00:48:38role of luck and i get frustrated with conversations about luck because it seems like an exercise sometimes of successful people in false humility that they just say well you know it was just all lock or most of it was luck and obviously i fully acknowledge the huge amount

00:48:56of luck that goes into any success story but it does sound a bit like a humble break Yeah well it just strikes me is not a very useful piece of information so sure there's there's a tremendous amount of lock and were literally two of the most lucky people

00:49:10that have ever walked the planet And so i'm not trying tio downplayed that right rule that at all But for those listening that for anyone that wants to do well i'm curious what you think about this entanglement of premeditation and luck given that you know you've got a

00:49:24list of stuff in your twenties some of it's pretty rehabilitation speed chairman of a major hearts organization for example some of it's pretty ambitious And it happened And sure there's lots of luck because along but i starting that i've never actually asked you this question I've never actually

00:49:40never talked about the role of luck in this specific way So how much do you think about the topic What How important is luck Yeah So i kind of think the old quote the harder i work the luckier i get I believe that having goals and having a

00:49:56process to try to reach them Look i i think the brain is a lot cooler than we currently understand And i think that by it's like affirmations right affirmations might work simply because by repeating it enough it gets into your subconscious which is really where most things go

00:50:15on anyway It's a great book on that topic talking about how the subconscious basically consumes ninety five percent of the brain's energy it's crazy So i think that if if you've primed your brain it sees things that you wouldn't otherwise see And so if you have a siri's

00:50:35of goals or process that you are working to get towards what you want and you're aware of that your your prime in your brain to see things that others don't see and many people call that luck right So it would be easy for me to say and it's

00:50:53true i am lucky that ben graham didn't have computers because of ben graham had computers He would have written what works on wall street because that was his nature I was lucky to be born in nineteen sixty right The computers were just catching on when and with useful

00:51:11tools When i was about twenty four nineteen eighty four so i had the eye was in the right place at the right time and then i had to talk my way into the data so and it was persistent because they didn't want to give it to me but

00:51:26i was lucky i was lucky that i was born when i was born i was lucky that i was born into the family that i was born into What is ah buffet call it the lucky sperm club or something like that and i'm aware of that and and

00:51:39i fully acknowledge that there's no question About that But i also tend to think that luck depends on how where you are or what's going on around you Unless it's just dumb luck right Like your mom was out walking and found a hundred dollar bill mean the an

00:51:57economist would say that's not possible because someone else could have found that on yet you were the first person to find it Dumb luck Yeah sure But you know fran lebowitz has a great quote which is your chances of winning the lottery are the same whether you buy

00:52:11a ticket or not So those kinds of dumb luck situations actually tend to lead to very tragic outcomes down the path so well there's no question that luck has played a role in my life Luck is the hand that you get dealt talent and achievement is the way

00:52:28you played that hand I'm sure there are other people who got dealt very similar cards to me and just didn't make it work Plus i'm sure that there are other people who had much worse hands in my hand and are doing much better than me But yes of

00:52:41course luck is a a big part Of what it means to be a human being but i would not attribute the majority of what i've been able to achieve toe luck most memorable day I've done a lot of fun stories times periods but not an individual day So

00:52:59what So in my my career So i think the most memorable day of my career was i when i got that huge offer from a big wall street investment house to take an ownership position in net folio i was like tap dancing right It's just like uh this

00:53:19is like the best thing that could ever have happened to me I'll always remember it um and and for a while i had framed that offer letter and kept it in my office to remind me of hubris I was very guilty of huber's because i know you know

00:53:35i'm going to get a better deal than this Well i didn't but it was a very very memorable day and it was a you know kind of like i went back and talked to your mom and i was like look at this and kind of really unexpected and

00:53:52kind of i'm not a terribly emotional person but i could just feel the you know the happy happy joy joy rising in me is an interesting question which gets at maybe like an innate skill centers or it's interesting way of identifying people's competitive advantage which is to ask

00:54:12what that you do looks like very hard work from the outside to most passive observers but doesn't feel at all like hard work to use What would those things be for you Well again being the laziest human on the planet i try to make everything i do look

00:54:27incredibly easy I don't want anyone i mean that would be bad form to make it look like it's hard i guess let me go back in my career and then bring you up to now So back in my career was my obsession with wanting to know with ultimately

00:54:47what turned out to be what works on wall street I had to do that year by year by hand because their so called program didn't work at all and literally i knew every stock the name of every stock i could tell you it's price i could tell you

00:55:02it's p e ratio i gave i remember giving an interview in canada and the interviewer was just like how do you know all this stuff I said spend two years in front of a computer screen looking at these names and you retain it so that looked really really

00:55:18hard kind of crazy to some people To me it was effortless It was because i every day woke up and i was like boy i'm lucky to be alive today because i'm going to go in there and i'm gonna figure out more So that was looked hard kind

00:55:35of was hard if you think about it i did it by hand basically beer by year by year by year Now mercifully we have all you smart people working for me and we don't have to do that anymore Now i think it is trying to always be calm

00:55:52about everything Most people are not calm right And i think that it is incumbent upon me and what i do right now to have a disposition even during the worst crisis That is one that people see that they're going to make it through it Your mom always said

00:56:14that i am absolutely at my best In a crisis that i just calm way down and just see things that maybe others don't see And i think that that looks hard People have told me that they think that that's hard it's not hard for me i mean it's

00:56:30kind of in my life and i love it right Because if you can settle people down if you can get them to stop the crazy things they're about to do like selling in february of two thousand and nine that's a win that's a really big win and you're

00:56:48not going to do it by being really really excitable like they are You're going to do it through being very calm and trying to help them out of there lizard brain into their fully formed brain So yeah that would be those would be the two things i think

00:57:06there's a pretty innate and again never once probably got some mixture of cultivated skills and innate skills You know what would be some cultivated one So what are some things that you feel because of your own experience You can actually get better at with work as opposed to

00:57:21just being born with a certain advantage So i think you could get better at being a communicator I think that i was lucky enough Ah like you two have a natural talent for communicating and for convincing people of things but i think you can get a lot better

00:57:41at it I mean you know zinser on writing well for example there are a lot of tools out there that if you avail yourself of them you become clearer You become more compelling You become mohr interesting to people and that you have to work at it's Great if

00:58:00you have a natural talent for it But i think that it's something that you khun take somebody who doesn't even have a natural talent and you could make them good at it You know for example how to win friends and influence people I never read that book until

00:58:14recently because i always thought oh man that sounds so corny You know that sounds so nineteen thirties and you know yes sir We're going to show you how to do it And so i never read it And then i was reading I think it was tim ferriss Ok

00:58:29is a podcast and a lot of people talked about that book and some of that okay i'm going to read it it's fantastic it's a great book and so communicating definitely you khun get much much better at it by reading on how to write better by learning how

00:58:47to speak better by learning what's interesting to other people right Generally speaking you're not interesting to them they're interesting to them and that's true for all of us So the more you read and practice and get to know that the better you're going to communicate in the better

00:59:04you're going to be able to help people to understand themselves and put your own message I think another thing that i've gotten a lot better at is in managing people i as i mentioned earlier i when i was younger and you know it will my first round of

00:59:23o'shaughnessy capital management i was a bit of a tyrant it was my way or the highway And so i read a lot that the drucker book i recommend it and but then i read some other books on ah you know what kinds of qualities did people who were

00:59:36really great managers Because i wasn't naturally a manager i still believe i'm not naturally a manager I was very good at that kind of pointing the way but i had very high expectations for people It was like well you know what's the problem here Yeah i've told you

00:59:52what i want you to do now just go and do it And what i found is very few people respond well to that they really need support and they need they need guidance and they need help And so i read a lot about it and started putting some

01:00:09of those things that i learned into practice and i think it made me a better manager because it was one i didn't have a natural talent at But you know you'll hear is you listen to me literally reading that's I mean you could make yourself a better person

01:00:26in virtually every category whether you have a natural talent there or not if you read read read read and then read some more because it's like looking at art you know your mom and i collect contemporary art and photography and you know what we did before we bought

01:00:44our first piece we went to every major museum that we could go to ah we're lucky to living in the new york area that we could go to the met moma in those places that now the whitney and we went not once or twice We went dozens and

01:00:58dozens of times you probably remember we took you kids there and really you educated You're either I remember i was asleep You were You woke up when we got to the arms and armor room though you really like that place because you really like the swords And plus

01:01:14you were always a foodie and the met has a great brunch And so you didn't really care about the art except the arms and armor But would you really look forward to and continually tugged on You know our jackets Can we go to brunch now Can we go

01:01:29to brunch now But you know looking i think was yogi berra Sometimes you can see a lot just by looking well in fact it's true And so if you expose yourself if it's art than you want to look at tons of art all kinds of different kinds of

01:01:46art if it's if it's other things you want to read as much as you possibly can and then read some more because there's always something to learn And and so i think that that's this more of a general category But i think that you know reading endlessly and

01:02:03specifically outside my area of expertise has helped me a lot in how i put together problems and thinking about things and then writing again i think writing is very important A cz you know when you were born i was twenty four years old I wrote my first letter

01:02:21to you at age twenty four and then gave you the book of letters Ah when you were twenty one or twenty two and reading it over i was kind of like wow i really haven't changed at all I was on to something but you know you you it's

01:02:40really big journal keeper and not just about goals just about everything I think the more you read the more you right the more you you take in the better you you can do a lot of different things aside from me letting you come on this podcast What is

01:02:57the kind of thing that anyone's ever done No Uh huh Yeah well that would be a close second Definitely a close second kind of thing that anyone has ever done for me I think the kind of thing that was ever done for me was done by a mentor

01:03:18of mine when we moved here to greenwich We you know were new to the area Your mother is a real nestor And so i had a certain amount of capital that i was going to put towards the business and getting o c m off the ground Ah but

01:03:34you know another maxim Happy wife Happy life So she needed a house And so i built that house consuming that capital It was supposed to go to the business on dh then found very inconveniently that i wasn't going to be given a mortgage because of my brilliance I

01:03:53need it you know to have a job but had paychecks and things like that So this man who had been in several business ventures with i was telling him my plate and he goes alone You the money I went really jim My really And he was yeah he

01:04:09goes I have no doubt I have no doubt that you will do great things because i know what you're like and again it's kind of that out of the blue and i took him up on his offer And of course naturally when the bank who i was trying

01:04:23to get the mortgage from found out that i didn't need it anymore then they wanted to give it to me should i just think is so hysterical and so true but he did that just because he believed in me and obviously it it helped me out Ah enormously

01:04:40and and let me go on to create what i did Well this is a lot more fun than i expected it to be Thank you Thanks for joining me let's because you get to do it every day appreciate your time as always hey always will make time mostly

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